Michael Custer, analyst at Solidiance in Shanghai, explains that healthcare service providers will come out on top from China’s healthcare reforms.
Until now, China’s healthcare system has served the rapidly developing country well. China impressively succeeded in its efforts to achieve universal healthcare coverage, bringing the insured rate up from 50% in 2005 to 95% by 2011. And, despite achieving universal coverage – a rarity for developing countries – the country has been able to keep costs relatively in check, spending just 5.5% of GDP on healthcare in 2014.
Two trends, however, are threatening the long-term sustainability of China’s system. First, China is experiencing a rapidly aging population. China’s old age dependency ratio, a reliable predictor of healthcare costs, will match that of modern day Japan by 2045.
Second, more of its population is becoming unhealthy. The rates of many chronic diseases as well as cancer are on the rise in China due to pollution, poor diet and unhealthy lifestyle choices. To put this in perspective, the diabetes rate in China is already higher than that of the US.
Without enforcing any reforms to the current system, these trends will lead to enormous strains on the government’s budget. According to Solidiance’s white paper titled “China Healthcare Reforms: Who Will Survive?”, it is projected that 20% of China’s government budget will be allocated to healthcare by 2045. That figure is nearly double what it is today, and behind only New Zealand and the United States.
Under more realistic scenarios, considering China’s growing health problems and an increased share in healthcare funded by the government, the share of state budget allocated towards healthcare will range from 24% to 33% – figures that are by far the largest in the world.
Without change, China’s current healthcare system will become unaffordable. The latest round of reforms, launched towards the end of 2015, are thus aimed at ensuring sustainability by reducing costs so as to create a more efficient healthcare system to its people.
For foreign medical device manufacturers and pharmaceutical companies, the reforms are especially worrisome, as the government is increasing the downward price pressure on both industries. The pharmaceutical industry, which makes up a much larger portion of healthcare spending in China than the device industry, is expected to feel the initial brunt of regulatory pressure.
Despite the reforms adding additional complexity, it is important to remember that China’s healthcare market is large and growing rapidly, with value projected to surpass US$1 trillion by 2020. With a market of that size, there are endless strategies that both foreign pharmaceutical and medical device companies can pursue to ensure a piece of the pie and capitalise on opportunities in China.
A key strategy suggested for multinational companies is to focus on developing and introducing new products. Innovative drugs and medical devices will continue to demand a premium in post-reform China. Additionally, maintaining the edge that foreign multinationals have in r&d and technology is crucial for future success as another emphasis of the reforms is to increase the technical capabilities of domestic healthcare companies, especially in the medical device sector.
Healthcare service providers, on the other hand, will benefit the most out of these reforms. China’s healthcare system is currently highly centralised. Chinese citizens tend to settle for level 3 public hospitals, widely regarded as the country’s best hospitals, to treat everything ranging from the common cold to cancer. This results in over-utilisation of level 3 hospitals and under-utilisation of clinics, level 1, and level 2 hospitals. This centralisation and lack of efficiency within the public healthcare system is unsustainable and results in poor quality, especially in specialty medicine, and significantly higher costs for the government.
The ultimate goal of enforcing these reforms is to move the Chinese system towards a more decentralised model such as those employed in Europe. To do this, the government is aiming to administer a hierarchal system of healthcare, encourage the development and utilisation of private facilities, and develop a nationwide system of general practitioners. It is this supportive regulatory environment combined with a growing middle class that is beginning to demand better quality healthcare services that will continue to fuel the growth in the private healthcare industry, resulting in increased foreign investment in the healthcare service sector within China.
The Solidance white paper “China Healthcare Reforms: Who Will Survive?” can be downloaded here.